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Planning Ahead: how to raise money for 2nd property in 1-5 years

Geoffrey

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Registered
Joined
Oct 7, 2007
Messages
27
Hi all,

In moving from a cheaper housing market to Victoria and currently renting, I can only afford a 400K condo as primary residence, which I will buy in the next 2 months. So, how to get ahead from that baseline?

Getting ahead from baseline for me/us means getting to a *nicer* condo or even a house (with rental suite) in the same city, hopefully within 1- 5 years. Current value of such a property would be 500k for a condo or 750K for a house.

I assume the market will continue to climb in the coming years. I can also assume income increase of 20K/a, principle paid on first property, and savings of about $1500-$2000/month. Selling the first condo would not be my chosen source of cash because of the advantages of the "buy and hold" strategy over the closing costs.

So the clear major challenge is how to finance the second property under this scenerio. Assuming market value increases of only 10% a year, a 500K condo would be 550K in 1 year. A 750K house would be 825K in one year.

How can we overtake the market without buying outside the city?

Readvanceable LOCs and second mortgages seem far too small to make the leap. Please tell me I'm wrong.

Thank you!
 

Matt Crowley

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REIN Member
Joined
Dec 14, 2013
Messages
980
Why do you think owning is better than renting? Run through the numbers of your assumptions here: http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=0

Canada is one of the top countries in the world that consistently ranks as better to rent than own from a financial standpoint. Basically since the 1990s where the rapid growth in prices was fueled by debt. If people are financially rational, the only explanation for this is in the property appreciation growth rate. What is the implied growth rate you need to achieve to meet the market? Beat it?

Assuming market value increases of only 10% a year, a 500K condo would be 550K in 1 year. A 750K house would be 825K in one year.

There is no such thing as "only" 10% per year. That is a dangerously exuberant market. Not normal growth. Are there a lot of advertisements around for flip this house? Become an instant millionaire? You are at the top of the market.

If you don't have a big nest egg to play with you are going to end up buying a no-cash flow product and betting on appreciation. If that appreciation doesn't materialize you have negative cash flow and you will need to keep feeding it every month. Appreciation / capital gains betting is for cash buyers, not 5% down. Or, go invest with someone who has ability to put 30 - 40% down and take a piece of a professionally managed product. This will also cap your downside.

If you buy with 5% down in a flat market you will need to stay in that home for 5 years to just break even after closing costs, CMHC fees, and land transfer costs. So your PPD growth is a total wash out.

Consider the gross metrics:

Monthly PPD payment: Gross mortgage / months of mortgage
- 25 year mortgage = 300 months
- thinking of a $400,000 house at 5% down with 3.6% CMHC fees, mortgage is $393,680
= 393,680 / 300 months = $1,312 payment for just principal every month to pay loan off in 25 years
- do you have 25 years left to work?
- Remember, initially mortgage will be over 50% interest at 3% interest rates, 60% interest at 4% interest rates, and 70% interest at 5% interest rates. You still need to pay off an average of $1,312 in principal over the term of the loan and pay all that interest.

Price to rent: more than 15, you are usually better to rent

Months of inventory = total listings / sales
- gives you an idea of where you are in the real estate cycle
 

Havan8655

Focused Investor
Registered
Joined
May 3, 2016
Messages
79
Why do you think owning is better than renting? Run through the numbers of your assumptions here: http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=0

Canada is one of the top countries in the world that consistently ranks as better to rent than own from a financial standpoint. Basically since the 1990s where the rapid growth in prices was fueled by debt. If people are financially rational, the only explanation for this is in the property appreciation growth rate. What is the implied growth rate you need to achieve to meet the market? Beat it?



There is no such thing as "only" 10% per year. That is a dangerously exuberant market. Not normal growth. Are there a lot of advertisements around for flip this house? Become an instant millionaire? You are at the top of the market.

If you don't have a big nest egg to play with you are going to end up buying a no-cash flow product and betting on appreciation. If that appreciation doesn't materialize you have negative cash flow and you will need to keep feeding it every month. Appreciation / capital gains betting is for cash buyers, not 5% down. Or, go invest with someone who has ability to put 30 - 40% down and take a piece of a professionally managed product. This will also cap your downside.

If you buy with 5% down in a flat market you will need to stay in that home for 5 years to just break even after closing costs, CMHC fees, and land transfer costs. So your PPD growth is a total wash out.

Consider the gross metrics:

Monthly PPD payment: Gross mortgage / months of mortgage
- 25 year mortgage = 300 months
- thinking of a $400,000 house at 5% down with 3.6% CMHC fees, mortgage is $393,680
= 393,680 / 300 months = $1,312 payment for just principal every month to pay loan off in 25 years
- do you have 25 years left to work?
- Remember, initially mortgage will be over 50% interest at 3% interest rates, 60% interest at 4% interest rates, and 70% interest at 5% interest rates. You still need to pay off an average of $1,312 in principal over the term of the loan and pay all that interest.

Price to rent: more than 15, you are usually better to rent

Months of inventory = total listings / sales
- gives you an idea of where you are in the real estate cycle
 

Havan8655

Focused Investor
Registered
Joined
May 3, 2016
Messages
79
Does one need to be to live for 5 years in principle residence after 5% downpayment and CHMC insurance? I believe 1 year is minimum for a person to live in principle residence after he/she qualify with 5% downpayment.
 

Thomas Beyer

0
REIN Member
Joined
Aug 30, 2007
Messages
13,881
Does one need to be to live for 5 years in principle residence after 5% downpayment and CHMC insurance? I believe 1 year is minimum for a person to live in principle residence after he/she qualify with 5% downpayment.

5% down with a 4.5% mortgage premium, legal fees and land transfer taxes in BC or ON, and realtor fees on exit means you will have negative equity for MANY years. If you move in one year in almost all cases you will lose money. Don't buy a piece of real estate unless you have a min 5 year view, unless you are a cash or LOC buyer in a fast rising market like Okanagan or Victoria right now but that market too in a year or 2 might slow substantially.
 
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